Why Some Nations Succeed

Why is it that some nations, such as Switzerland, respond quickly to the need for reform – improving railroads, health care systems and schooling – even before the systems break down? And why do other nations, such as Italy and France, wait until major crises are upon them before introducing institutional change? Some, such as Daron Acemoglu and James Robinson, take a deterministic stance. The acclaimed writers of Why Nations Fail believe that cultural and geographical differences, or even historical accidents, put countries on to different trajectories of institutional development which are more or less conducive to growth. Although clearly relevant, this view is incomplete. There are often courageous individual leaders launch far reaching reforms that are initially unpopular, and gain acceptance first after they yield visible results.

Take Canada as an example. The country was in very bad shape when a new left-liberal government took over power in 1993. Newly appointed Prime Minister Jean Chrétien and minister of finance Paul Martin worked on introducing an ambitious reform agenda. The administration made the difficult choice of market reforms, focusing on liberalizations and reduced spending through action such as abolishing transport subsidies for farmers. These measures were not popular amongst interest groups, the general public, or within the liberal party itself. The new government even introduced higher taxation initially, in order to deal with the deficit and massive public debt. Although each of these steps on their own were anything but popular, voters acknowledges that they would together benefit the country in the long term. The Liberal party was re-elected, and continued with reformist policies. In the coming years, reductions in government spending were used both to deal with the debt and to reduce the tax burden. After yet another successful re-election, Paul Martin took over the reins and won a fourth consecutive term. Later conservative governments have built upon the same policies. Canada is now North America’s new free market role model, but combines this with more generous and effective social policies than its larger neighbor country.

In spite of ideological differences, experts often roughly agree on what reforms are needed to move forward. In Canada during the early 1990s, it was rather clear that a move towards more limited government and better business climate could boost job creation and entrepreneurship. At the same time it was also clear that similar changes were needed in countries such as Italy, France and Greece. Yet, only many years later, after experiencing stagnant growth and deep recessions, are the latter three countries grudgingly moving in this direction. One explanation might be that market reforms are less appealing in some nations than others due to ideological differences. Another is that structural changes overall are more difficult to introduce in some parts of the world. Jean-Claude Juncker, a likely candidate for the EU-presidency after two decades as Luxemburg’s Prime Minister, famously lamented “We all know what to do, we just don’t know how to get re-elected after we’ve done it.” What does it take for the general public to accept structural reforms, or even demand them?

In our new book “Renaissance for Reforms” we discuss the concept of “reform threshold”, the point at which a people demand change in response to a perceived problem or challenge. Switzerland is clearly a country with a low reform threshold. Swiss governments have reformed continuously without the catalyst effect of deep crises. According to the reform barometer compiled by the think tank Avenir Suisse, Switzerland has reformed slightly more deeply than Germany since the turn of the century. Germany reformed extensively for a few years between 2002 and 2005 as a response to high unemployment, Switzerland, without such an outside stimulus, has reformed steadily and slowly, and always from a position of economic success.

One example is that the Swiss made the unemployment insurance system stricter in order to incentivize people to find a new job. The reform in itself is not uncommon amongst developed countries. What sets Switzerland apart is that the change was introduced before dependency of unemployment insurance had reached high levels. In countries with a higher threshold for reforms, it would have been difficult to pass new rules in absence of an unemployment crisis. We believe that gradual and continuous reforms are in many ways a more advantageous approach, both from an economic and a social perspective, than major reforms following downturns. If the Swiss had opted to retain the previous system, a future crisis may have forced sudden and dramatic cut backs.

Canadians, much like the Swiss, have shown an interest in reforms that can boost growth, although the two nations already have amongst the best business climates in the world. One explanation is that previous positive experience has raised the appetite for change. Focus is more on how to expand economic and social opportunities in society overall, compared to France, Italy and Greece where the debate centers on how existing resources can be distributed.

Reducing the resistance to reform is easier said than done in most countries. What is needed is long-term commitment to change combined with an evidence-based approach where each reform is objectively studied by researchers in order to map its effects. Institutional competition is another key element. The Swiss test many ideas in their Cantons before introducing them on federal level. If the general public believes that changes are not introduces on a whim, but rather can be shown to have certain effects, support for change will likely increase. In the long-run, we believe that the low threshold for gradual institutional change that exists in Switzerland and Canada is a key for good governance. Perfect political systems are impossible to achieve, but it is still possible to adapt routinely to a changing world. And for each good policy, hopefully the threshold for introducing the next one can be lowered.

Dr. Nima Sanandaji is a frequent writer for the New Geography. Stefan Fölster is Professor of economics at the Royal Institute of Technology in Sweden and director of the Reform Institute. The authors are upcoming with the book ”Renaissance for Reforms” which is co-published by Timbro and the Institute of Economic Affairs.